All posts by Paul Sippil

Paul Sippil is a former auditor, recovering CPA, and independent registered investment advisor who uncovers the fraud, corruption, conflicts of interest in the retirement plan industry. He moonlights as a community organizer and advocate for connecting people with one another through a farm-to-table community dining and wellness club promoting sustainable farming, conscious food choices, stronger social bonds, and meaningful conversations that he started in March of 2015.

Retirement Plans Likely Paying Excessive Compensation to Service Providers

I have identified this list of over 400 retirement plans throughout the Chicago area that are likely paying excessive compensation out of plan assets.  I say likely rather than definitely because something may have changed since the most recent 5500 form was filed, and I do not know the specific level of services being provided.  However, being an independent registered investment advisor specializing in providing advice with respect to group retirement plans and having reviewed over ten thousand 5500 forms over the past decade, I have become sufficiently familiar with the marketplace to determine what constitutes reasonable provider compensation for a full range of service levels.  Consequently, I can confidently say that many of these plans are still paying excessive compensation even if they are receiving high levels of service because there often still isn’t enough work to do to justify these compensation levels.

Law firms:

Lavelle Law

Chapman & Spingola LLP

Stein Ray LLP

Barker & Castro

Mcgann and Matesevic Ltd.

McCracken, Walsh, Carlisle, and De Lavan

Edward Jaquays Law Office

Johnson & Bell

Applegate & Thorne-thomsen P C

Stowell & Friedman, Ltd.

Ariano Hardy Nyuli Johnson Richmond & Goettel PC

Lillig & Thorness Ltd.

Inman & Fitzgibbons Ltd

Corboy & Demetrio

Masuda Funai Eifert & Mitchell Ltd

Querrey & Harrow Ltd

Barack Ferrazzano Kirschbaum & Nagelberg Llp

Anesi Ozmon Rodin Novak & Kohen Ltd

Okeefe Lyons & Hynes Llc

Williams Montgomery & John Ltd

Pattishall Mcauliffe

Klein Thorpe And Jenkins Ltd

Tenney & Bentley Llc

Levenfeld Pearlstein

Wiedner & Mcauliffe Ltd

Donohue Brown Mathewson & Smyth

Beermann Pritikin Mirabelli Swerdlove

Schuyler Roche & Zwirner A P C

Robbins Salomon & Patt Ltd

Hughes Socol Piers Resnick & Dym Ltd

Drane & Freyer Limited

Johnson & Bell Ltd

Eimer Stahl Llp

Pretzel & Stouffer Chartered

Fuchs & Roselli Ltd

Berger Schatz

Figliulo & Silverman P C

Scariano Himes And Petrarca Attorneys At Law Chartered

Hamilton Thies Lorch & Hagnell Llp

Flanagan Bilton

Meltzer Purtill & Stelle

Hoogendoorn & Talbot Llp

Ruff, Freud, Breems & Nelson Ltd.

Speers Reuland & Cibulskis PC

Pugh Jones Johnson & Quandt PC

Hodges Loizzi Eisenhammer Rodick And Kohn

Foran Glennon Palandech & Ponzi PC

Stellato & Schwartz Ltd

Molzahn, Rocco, Reed & Rouse, LLC

Richmond Breslin Llp

Franks Gerkin & Mckenna PC

Cullen Haskins Nicholson & Menchetti PC

Hogan Marren Ltd

Inman & Fitzgibbons Ltd

Dimonte & Lizak

Capron & Avgerinos P C

Glenn Stearns Chapter 13 Trustee

Whitt Law

Hoey & Farina  PC

Scandaglia & Ryan

Scott & Kraus LLC

Heineke & Burke LLC

Bronson & Kahn Llc

Crowley & Lamb

Grund & Leavitt

Walker Wilcox Matousek Llp

Non-law firms:

Genesis Clinical Services

Gerald Mackey D.D.S.

New Age Periodontics/Glen Periodontics

Keith P. Rojek, D.D.S.

Mark A Wojciechowski DDS

Fischl Dental Associates

Engineered Packaging Solutions

Tyler Medical Services

Tower Dental Associates

Ofelia B Ayuste, MD

Chicago Prostate Center

Chicago Anesthesia Associates

Blake Horio MD

Behles Family Dental Care LLC

Barbato & Zbiegien, M.D., S.C.

Anthony R Markiewicz DDS

Allied Anesthesia Associates

Allergy & Asthma Consultants

Excel Occupational Health Clinic

Evaskus & Herzog

Fairview Dental Group

Family Practice Specialist

Mark Allan Berk MD

David R Musich, DDS & Matthew J Busch, DDS

Dean Lodding Smiles

Dentistry for Kids

Denise M Lindley & Associates

Jeffrey M Grimley DDS

Jeffrey M Goldberg Law Offices

Deeke Animal Hospital

James D Rohan DDS

Millennium Endodontics

John Querin Cook MD

John J Perna DDS

Opthamology Partners

Paul L Engen DDS

Paul J Willis DDS & Elliot Abt DDS

Orthopedic Associates of Riverside

Lake Shore Obstretics & Gynecology LLC

Stephens Dentistry

Sharon L. Horton MD

Schweitzer Family Dental

Scheer Surgical

Schaumburg Oral & Maxillofacial Surgery

Rubin Veterinary Services

Ravenswood Dental Group

Triad Radiology & Imaging

Comprehensive Pain Care

Drs. McCullom

ABC Dentistry

Advanced Fertility Center of Chicago

Aesthetic & Clinical Dermatology Associates of Hinsdale

Robert C. Malenius D.D.S.

Moria C Ariano MD

Animal Care Clinic Fox Valley

Greg E Sharon MD DBA Allergy & Asthma Center

Asthma & Allergy Center

Plainfield Pediatric Dentistry Ltd.

Pinski Dermatology & Cosmetic Surgery

Progressive Medical Center

Richard N Gershenzon DDs & Assoc

Midwest Respiratory

Midwest Minimally Invasive Spine Specialists

Michigan Avenue Internists LLC

Michael E Bond DDS

MedHQ LLC

Mechanical Engineering Products Co.

Meadows Dental Group

Mark J Landau DDS

Pulmonary Consultants

Rita J Tamilu-Shea DDS

Illinois Implant Dentistry

Harold J Krinsky DDS

Harold Jaimes MD

Wheaton Pediatrics

Mary Ha DDS

KSA Lighting LLC

Just Rite Acoustics Inc.

John J Pempek Inc.

Heynssens & Grassman Inc.

Healthcare-ID Inc.

Harrison Street Real Estate

Graham Carreras Holdings LLC

Framarx Corp.

Ability

Ad/Solutions Group Inc.

Air Source Products

Americ (The Elks Grand Lodge)

American Overseas Transport

Burns Entertainment & Sports Market

CCM Inc.

Apex Dental Materials

Applied Finance Group

Winters Family Practice

Video Refurbishing Services

Vincor Ltd.

Tsurumi America

Top Hits Inc.

Tool King Inc.

Tidal Construction Services

Thorndale Construction Services

Thermosoft International Corporation

The Women’s Practice LLC

The Stationary Studio LLC

The Sign Place Inc.

The Rubicon Group Limited

Worldbridge Partners Chicago

The Engineering Studio Inc.

Telecom Management Inc.

Tele-Fonika Cable Americas Corp

Synergistic Enterprises Inc.

Travis Inc.

Tovar Snow Professionals Inc.

Sky Road LLC

Skokie Valley Air Control

Skokie Meadows Nursing Centers

Single Path LLC

Simplomatic Manufacturing

SSC Installations

Rock Island Capital LLC

RKA Applied Solutions, Inc.

Redi-Strip Co.

Rail Exchange

Radco Industries, Inc.

Practical Environmental Consultants, Inc.

Porter Lee Corp

Pivot Design

Onshore Networks of Illinois, LLC

Metal Parts & Equipment Co.

Maywood Glass & Mirror

Maller Peterson

Malcolm S Gerald & Associates, Inc.

Machine Solution Providers, Inc.

Quality Restorations

Lindbald Construction Co. of Joliet

Lionheart Critical Power Specialists

Lincoln Way Community Bank

Leeds Auto Sales

Lemko Corporation

Lapmaster International

Kraff Eye Institute

Kleen Air Service Corporation

King Koil Licensing Co Inc.

JLO Metal Products

International Facilities Group

Inrule Technology

Industrial Water Treatment Solutions

Jelmar LLC

Friedrich-Jones Funeral Home

Extent Systems

Elite Wireworks Corp DBA Active Wireworks

Elite Staffing Inc.

Elgin Beverage Co

Elara Energy Services

Designation Inc.

Doering Landscape Co.

Diehl Controls North America

Dere Tire & Auto Inc.

Dan Wolf Motors of Naperville

Cullen-Ehrens Inc DBA CEI Transport

Contemporary Marketing Inc

Consolidated Buying Co LLC

Concrete Reinforcing Steel Institute

Arbon Steel and Service Co

Barton Management

Adams Plastics LP

Abelei Inc

A & N Mortgage Services

National Seed

1st Equity Bank

Scurto Cement

Integrated Project Management Co Inc.

Perfection Spring & Stamping

Hayes Mechanical LLC

Telcom Innovations Group LLC

Orland Toyota

Karl Lambrecht Corp.

American Association of Oral & Maxillofacial Surgeons

ISK Industries

Arpac LP

Institute of Food Technologists

Bar Code Graphics Inc.

First Security Systems

Keeley Construction

Edwin Hancock Engineering

Europa Eyewear Corporation

Applications Software Technology

Comet Die & Engraving Co.

Fitz Chem

Rezek, Henry, Meisenheimer, & Gende,

Maron Electric

Fort Dearborn Partners

Hall Technologies

Imperial Crane Services

Mills-Winfield Engineering Sales Inc.

Golan’s Moving & Storage Inc.

The Abrix Group

Vitacolor

Creative Die Mold Corp.

Craftsman Tool & Mold Co.

High Ridge Partners (only has information through 2015)

Stephens Plumbing & Heating Inc.

Plitek LLC

Interpro Translation Solutions

Advanced Data Technologies Inc.

Gallagher Corporation

Nagel Trucking & Materials Inc (Axle Equipment)

Cambium Networks

Palos Sports

Welding Industrial Supply

Oak Lawn Toyota

Motivation Excellence

Admiral Heating & Ventilating, Inc.

Great Lakes Medicaid

Global Material Technologies

BST Pro Mark Inc

C Cretors

International Sanitary Supply Assoc Inc.

RPS Engineering

Elenco Electronics

Reebie Stores & Moving Co. Inc.

Chicago Backflow

WM W Meyer & Sons Inc

Midtronics

American Association of Insurance Services

Action Electric Sales

Digital Check Corp.

Hitzeman Funeral Home

Wickland-Zulawski & Associates

Mid-west Neon Supply Co

The Rubicon Group Limited

The Quarasan Group

Mowery & Schoenfeld LLC

Rico Industries

Mackay & Co.

Knight Partners LLC

Salco Products Inc.

The Cary Co

Thoma Bravo

Antarctic Mechanical Services

The Toms-Price Co

Belman Melcor LLC

Progressive Components International Corp.

ACC Industries

Benetech Inc.

Qualitas Manufacturing, Inc.

Urban Innovations

Focal Point LLC

Keystone Aniline Corp.

Automatic Feeder Co Inc.

Krenzien Krenzien & Associates

The Claro Group LLC

Platt Luggage

Metalloy Co

The Stoelting Co

Robert J. Sheehy & Sons Funeral Home

Chief Enterprises

Executive Construction

Northern Builders

Eckenhoff Saunders Architects

Vorne Industries

North American Signal Co.

Tukaiz LLC

Delta Engineering Plan

Comgraphics

Ultratech Inc.

Ron Tirapelli Ford Inc.

Hartz Construction

La-Co Industries

Continental Electrical Construction

The Allant Group

La Marche Mfg. Co.

Halsey Drug Co., Inc. (now Acura Pharmaceuticals)

Sign Works Inc

Etymotic Research Inc

United Engravers

Channer Corp

B & K Equipment Co, Inc.

Connelly Electric Co

Inland Fastener

STR Partners

Joliet Avionics

Apollo Colors

Superior Exhibits & Design Inc

Evans Food Products Co

Evenhouse & Co PC

TT Technologies Inc

JST Corp

Jennings Realty

Weldstar Company

Thelen Sand & Gravel Inc.

Revere Electric Supply

Meccon Industries

Optimus Inc.

Association for Women’s Health Care Ltd.

Mallof Abruzino & Nash Marketing Inc

Exequity LLP

Olsson Roofing

G & O Thermal Supply Co.

Aztech Engineering

Serac, Inc.

Waterstone Management Group

Harbour Contractors, Inc.

Schuyler Roche PC

The Sidwell Co.

Bowman Barrett & Associates, Inc.

Topel Forman LLC

Iga, Inc.

Mill Specialties Inc

The Pate Co

Food & Paper Supply Co

Schiele Graphics

Kaluzny Bros Inc.

Simpson Technologies Corp.

Star Inc.

Manhard Consulting, Ltd.

FGM Architects Inc

Lipman Hearne Inc

Holabird & Root

Wineberg Solheim Howell & Shain PC

Engis Corp

Casey Products Inc

Comprehensive Marketing, Inc.

Single Source Inc.

Hawk Electronics

J/B Industries

Crane Construction Co Inc

Homewood Disposal Service

Storck USA LP

International Airport Centers LLC

Pasquesi Inc

US Trailer Parts & Supply Inc

Hoffman Transportation

Cougle Commission Co

Voss Belting & Speciality Co., Inc.

Treasury Strategies, Inc.

Christian Communications of Chicagoland

Denali Capital LLC/Now Resource One

Tallman Equipment Co Inc

Standard Equipment Co

Heritage Wine Cellars Ltd

Chicago Switchboard Co

Cunningham Meyer and Vedrine PC

Lechler Inc & Subsidiaries

National Van Lines

Gregga Jordan Smieszny Inc

Strube Celery & Vegetable Co

Authentify

Stone Design

Ironwood Industries

Zacks Investment Research

Kempler Industries

Institute of Real Estate Management

Carolina Wholesale Office Machine Co Inc (Also known as Arlington Industries)

Outlook Marketing Services

Garveys Office Products Inc

TA Cummings Jr Co Inc

Jamerson & Bauwens Electrical Contractors Inc

Lake Capital Management LLC

Quinlan & Fabish Music Co

Itentive

Resource Management Ent Inc

Illinois Wholesale Cash Register

Belvedere Trading LLC

St. Charles Trading

Gemco Roofing and Bldg Supply

II in One Contractors

Mega Circuit

Anasco

Active Glass Co Inc

Donald Gaddis Co Inc

Forming Concepts

First Environmental Laboratories

Ray Sagan & Sons Inc

Harris Steel

Mcgrath-Colosimo Ltd

K & M Printing Co Inc

Custom Data Processing

Adelphi Enterprises Limited Partnership DBA Bredemann Lexus

First Family, Inc. DBA Bredemann Chevrolet, Inc.

P-K Tool & Manufacturing Co

Garoon

Welch Bros

Computer Projects of IL

Computer Aided Technology, Inc

Berglund Construction

New Metal Crafts

ME Fields

CTM, Ltd.

Leasing Associates of Barrington

National Roofing Contractors Assoc

Corporate Concepts

Arlington Industries

BE Atlas

Fujikawa Johnson Gobel Architects

Edon Construction

Camelot Paper

Quad Plus, LLC

Raco Industrial Corp

Chicago Scenic Studios

Spartanics

Harting, Inc.

Hart Travers & Associates, Inc

Tox-Pressotechnik

Capsonic Group LLC

Royal Management Corp.

Spectra-Tech, Inc.

Ray Sagan & Sons

Haapanen Bros.

Donohue, Brown, Mathewson, & Smyth (law firm)

AJ Antunes

Bullock Logan & Associates

Bird-X

GDHWD & Eberle, Inc.

The Visual Pak Companies

Interior Alterations

Directions, Inc.

Central Sod Farms

Poli-film America

Gamma Technologies

Komar Screw

Genesis Group

Calumet Carton

Chicago Cutting Die Co

Suburban Door Check & Lock Service Inc

Discount Media Products, LLC

Neuco Inc

Fox Valley Fire & Safety Co, Inc.

Tranzact Technologies

Maddock Douglas

Tyler Lane Construction

Porter Supply Co Inc

Omnibus Productions

Morton Grove Supply

Mah Machine

DM Merchandising

James J Benes & Associates, Inc.

Reliance Orthodontic Products, Inc.

Conway Import Co. Inc.

Essex Electro Engineers

Gallagher Asphalt Corp.

Metalstamp, Inc.

Brandenburg Industrial Service

Henricksen & Co., Inc.

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Why Most 401(k) Plans Should be Abolished

401(k) plans are seen as a competitive benefit to employees that supposedly enhances the compensation package, but the truth is often just the opposite.  As I have explained before, every dollar that employers contribute in the form of matching or profit sharing contributions could have otherwise been paid out as a bonus.  While the tax deferral brought about by forced savings might seem like a good idea, the unnecessarily high fees that most participants incur often outweigh the advantage of the tax deferral.  Furthermore, offering a retirement plan has a litany of compliance requirements, which take time and resources (both financial and non-financial) away from running the business.

But perhaps the most compelling reason has to do with inadequate employer and employee participation (this is the case for most plans I see), as the main advantage of company sponsored plans is the ability to defer significantly more than what could otherwise have been contributed to an IRA, which currently has annual limits of $5,500 plus a $1,000 catch-up contribution for those over 50.  If an employee is only contributing $2,000 annually and the employer puts in another $500, for example, that $2,500 doesn’t even come close to the IRA limit, yet in many cases, the employee could have purchased the same funds available in the company sponsored plan at a lower price because IRAs don’t have record keeping, administration, or custodial fees (low cost index funds are a prime example).  In addition, financial advisors usually get paid from participants’ accounts regardless of whether or not the participant uses the advisors’ services, whereas the only way for an advisor to get paid from an IRA is to come to an agreement with that individual.  If employers are worried that their employees may not make the effort to contribute to an IRA, they can still hire a financial advisor to educate their employees.  In most cases, this solution makes far more sense, but employers rarely take the time to think about why they even have a plan, usually because they are too busy running their business, and the advisors, administrators, and record keepers are too busy extracting money from the participants’ accounts to tell their clients that they aren’t adding enough value to justify keeping the plan.

Granted, in some instances, highly compensated employees will not be able to receive a deduction (or only a partial deduction) for traditional IRA contributions and may not be able to contribute to a Roth IRA due to their income, but they can still save as much as they want in a taxable account.  If they invest in low cost, tax efficient, passively managed funds as they should, then giving up the tax deferral will be far less costly than investing in less tax efficient investments such as actively managed funds.

Some employers may object to terminating the plan because of outstanding loans, but this claim is erroneous due to the fact that employees can simply roll over the outstanding balance into an IRA.  As it states on the IRS website:

“Plan sponsors may require an employee to repay the full outstanding balance of a loan if he or she terminates employment or if the plan is terminated. If the employee is unable to repay the loan, then the employer will treat it as a distribution and report it to the IRS on Form 1099-R. The employee can avoid the immediate income tax consequences by rolling over all or part of the loan’s outstanding balance to an IRA or eligible retirement plan by the due date (including extensions) for filing the Federal income tax return for the year in which the loan is treated as a distribution. This rollover is reported on Form 5498.”

 

 

Thoughts on Constructing a Fund Line-up and Why I Don’t Recommend Actively Managed Funds

While this headline seems to suggest where I fall on the Active vs. Passive Debate, I actually I don’t take a side and find the debate woefully incomplete when it comes to thoroughly discussing how to properly construct a fund line-up for group retirement plans.  A more accurate title should be “The Simplicity vs. Complexity Debate” because this dichotomy truly gets at the heart of the question on how employers should set up retirement plans that benefit plan participants rather than solely the service providers.

Let’s start with the ideal number of investment options.  Chris Carosa, author, journalist, investment adviser, and chief contributing editor of Fiduciary News wrote a fantastic three part series to help answer this question.  I can summarize as follows:

  1.  Service providers can assess greater fees based having more investment options.
  2.  Too many choices confuses participants, causing them to split their dollars evenly among several funds, creating a portfolio similar to a low cost index fund, yet much more expensive.
  3.  Too many choices adversely affects participation rates and leads to sub-optimal decisions.
  4.  Retirement plans ideally should have no more than 10 investment options.
  5.  Limited choices gives participants greater satisfaction.

I would also add that I typically see at least 15 investment options in plans I review, and often more.  And in each case, I have seen that most of these investments have a high degree of correlation, which is defined as:

“a statistic that measures the degree to which two securities move in relation to each other.”

Consequently, because participants tend to spread their money out throughout different funds which are often actively managed, likely because they believe that doing so creates greater diversification, they have a false sense of security.  On the contrary, they could actually achieve an extremely similar portfolio with greater diversification and fewer funds (not to mention far lower costs!), as exemplified by the Schwab Total Stock Market Index Fund (SWTSX) which holds 2,423 securities and costs 0.03% and the Schwab International Market Index Fund (SWISX) which holds 948 securities and costs 0.06%.  If participants knew they could spread their money out throughout over 3,000 companies while incurring minimal costs with only two funds, they would likely make different decisions.

From an employer standpoint, simplicity makes sense from a compliance perspective because it’s easier to construct an investment policy statement (a written description of a plan’s investment-related decision-making process) that employers can consistently follow.  I have explained more in a previous post.

Financial advisors thrive on adding additional and unnecessary complexity as well as keeping employers in the dark about simpler, lower cost options because most if not all of their value proposition hinges upon selecting and monitoring the funds that will continue to outperform the market.  Granted, as Chris Carosa has also pointed out,

There you have it. In short, this one paper (Broker Incentives and Mutual Fund Market Segmentation), perhaps not as well read as it should be, almost accidentally seals the deal for the fiduciary standard, exposes the conflict-of-interest created by 12b-1 fees and, dare we say, touches the forbidden third rail of all investment research: it shows – within the direct-sold fund channel – index funds have no inherent advantage over actively managed funds (and suggests past studies may have reached opposite conclusion by over-weighing the impact of broker-sold funds); thus, adding another nail to the coffin in the all-too-often repeated misconception that passive consistently outperforms active.

So yes, lower costs for the funds don’t matter if you are comparing direct sold funds to index funds, but because this same paper “concludes direct-sold mutual funds (including institutional funds) outperform broker-sold mutual funds by 1%”, it is clear that fund costs DO matter if they are sold their brokers.  And yet, the registered investment advisors who recommend a litany of actively managed funds will charge more for the additional work of selecting and monitoring a more complex line-up which has no  inherent advantage over comparable index funds.

Carosa willingly admits, however, in his book “Hey! What’s My Number” that the primary questions that influence an investor’s wealth include:  when to start saving, how much to save, and when to retire – all of which a good behavioral coach can help effectively answer throughout an investor’s lifetime.

He also cites a study from the Center for Retirement Research at Boston College which states:

“Assuming a CRRA (coefficient of relative risk aversion) of 5, the amount required to compensate a household for a retaining a typical portfolio (where 36 percent of assets are invested in equities) rather than switching to an optimal portfolio allocation (where 51 percent of assets are invested in equities), is $5,600, or approximately the additional amount the household would earn if it delayed retirement by one month.  In contrast, when the comparison is between a typical portfolio and an all-stock portfolio, the household is better off by approximately $3,600, or under one month’s salary.  That is, an all-stock portfolio is even more sub-optimal than the typical conservative portfolio.  The key message, however, is that the dollar amounts are small, suggesting that asset allocation is relatively unimportant for the typical risk-averse household.  Even if the household is less risk-averse (CRRA equals 2), the story is similar.  In this case, as shown in Table 10, the optimal portfolio is all in stocks.  The cost of retaining a typical portfolio (57 percent in equities), rather than switching to an optimal portfolio (100 percent in equities), is $25,700, or just over four months’ salary.  As the optimal portfolio is 100 percent in equities, the cost of retaining a typical portfolio relative to an all-stock portfolio is also $25,700.  In short, regardless of the degree of risk aversion, asset allocation is relatively unimportant for the typical household.”

My Value Proposition pages of my website providers a fuller account, but in summary, retirement plans simply need to have a few low cost index funds and no more than 10 funds in total.  Any plan more complicated than what I have stated aims to benefit the service providers at the expense of plan participants.

 

 

 

 

It’s Easier to Fool People Than to Convince Them They Have Been Fooled

Some attribute this quote to Mark Twain, although no proof exists.  Whoever the source, this person possessed great insight into the human condition.  The retirement plan industry serves as an ideal example.  To explain, I have had thousands of conversations with business owners, chief financial officers, controllers, and human resources directors who oversee their organization’s retirement plans.  In almost all cases, when I raise concerns about the fact that participant service fees have continued to increase without these participants receiving any additional services in return and are completely divorced from the services provided, the responses generally go like this:

  1.  We have reviewed everything and we’re fine.
  2.  We have reviewed everything and we’re in line with everyone else.
  3.  Our advisor takes care of all that.

In spite of me pointing out that I can see years worth of exorbitant service fees shown on their publicly available tax forms, these plan sponsors don’t seem to care.  Even when I make it clear that I am not looking to sell my services to them, but rather simply explain to them how they can put a stop to these unfair service and fee arrangements, they reply that they are not interested in my services.

Here are some observations about human behavior I can now make as a result of these conversations.  People:

  1.  Generally do not want to admit they don’t know about information vital to fulfilling their job responsibilities.
  2. Assume that if they never heard this information, it must not be true.  Otherwise, they would have already known about it.
  3.  Would rather see plan participants lose enormous amounts of money (including their own!) and ignore their fiduciary duties than admit to their co-workers they don’t know something and/or do any extra work.
  4.  Value longstanding relationships more than money and are less likely to scrutinize the value of relationships the longer they have been in place and the closer they are (i.e. friends and family members).

The recent fee disclosure rules and fiduciary standard purport to help protect the interests of plan participants.  But as usual, bureaucrats have no understanding of the industry they are controlling regulating and give little thought to the consequences of these mandatory solutions.  Plan sponsors already view the retirement plan as a back burner item because it has no effect on revenue, so they are already looking for any excuse to spend as little time as possible monitoring the retirement plan.  Now that brokers will be considered fiduciaries who have a legal obligation to “act in the best interests of the client”, plan sponsors will be even less likely to scrutinize their offering than before.

Our compulsory public school system (private schools aren’t much different in their philosophy) stresses rigid adherence to centrally imposed guidelines and discourages us from delving deeper into a subject beyond what it requires.  Our system has long taught use to move on to the next subject once we have displayed minimum competency as defined by the state.  These standards don’t require delving deeply into a subject or asking any substantive questions that demonstrate an ability and desire to apply these questions to every day life.  So after years of inculcating this mindset into children, what happens to us as adults?  The retirement plan industry represents a frightening example in which we now have people with little or no financial skills who the state has taught not to ask probing questions overseeing 6.8 trillion of people’s money.  We don’t need more mandates or committees to solve this problem that this kind of thinking has helped to promote.

 

 

 

John Oliver’s Commentary on the Retirement Industry

One of the best ways to get people’s attention is satire, and for this reason, John Oliver did the American public a great service by comically pointing out the insanity of the retirement plan industry.  As of this date, it has nearly 5 million views, so apparently he has reached quite a few people.  It felt refreshing to hear someone with such a large audience echo what I have been speaking and writing about for so long:  the retirement plan industry is a giant ripoff!  I especially like how he shed light on annuities which I have written about in a previous post.  I also like the analogy he made with termites, describing as tiny and barely noticeable much like retirement fees that can eat away at your future.

Now maybe people won’t be intimidated to ask basic questions like:

  1.  How do financial advisors get paid?
  2.  What do all the job titles in the retirement industry really mean?
  3.  Should I be paying for services in my retirement plan that I never use?
  4.  How much will all of my service fees cost me over my lifetime?
  5.  And what exactly do all of the service fees in my retirement plan really include?

While John Oliver helped stimulate these kinds of questions (not an easy task when communicating with a mass audience), he could have gone further.  For example, he touted the importance of the fiduciary designation, but given the complexity of the fiduciary rule, he could have warned consumers that simply being a fiduciary does not guarantee that advisors will act in the best interests of plan participants as advisors can recommend record keepers like John Hancock – the same provider that Oliver criticized and decided to get rid of because of their service fees – yet still not violate their fiduciary status.  Furthermore, advisors acting in a “fiduciary capacity” can still charge based on a percentage of plan assets, often resulting in advisory fees completely disproportionate to the level of services provided that still create conflicts of interest.

And while he does a good job pointing out the fact that actively managed funds sold through brokers do not consistently outperform the market, it would have been more helpful if he focused on industry’s addiction to asset-based fees and the retirement plan service providers’ collective desire to deliberately make plans more complicated than necessary in order to sell unnecessary additional services.

Maybe John Oliver will read this blog and consult me if he does a follow up program!

 

Better Call Saul: Maybe He Needs to Expose the Retirement Plan Industry’s Practices Too

In the first season of Better Call Saul, Jimmy visits a retirement home and learns that the management company has been systematically and massively overcharging their residents for various items like Kleenex where they have to pay upwards of $8 per box.  He became suspicious when looking at one of the resident’s bills and seeing that it was written in such small print that it was clear the management company didn’t want the residents to understand the details of their scam.  Upon uncovering these misdeeds, Jimmy gathers evidence in order to bring this company to trial where he and his brother Chuck seek $20 million in damages due to racketeering, which is defined as:

“A service that is fraudulently offered to solve a problem, such as for a problem that does not actually exist, that will not be put into effect, or that would not otherwise exist if the racket did not exist.  Conducting a racket is racketeering.  Particularly, the potential problem may be caused by the same party that offers to solve it, although that fact may be concealed, with the specific intent to engender continual patronage for this party.  An archetype is the protection racket, wherein a person or group indicates that they could protect a store from potential damage, damage that the same person or group would otherwise inflict, while the correlation of threat and protection may be more or less deniably veiled, distinguishing it from the more direct act of extortion.”

In the case of the retirement plan industry, it’s more than just one company conducting a racket.  It’s a network of large retirement plan service providers, attorneys, and government regulators who continue to tout the importance of the survival and growth of their industry in order to solve our “retirement crisis” that they have all played a major role in creating so they can further their own careers.  Similarly, they all recently agreed on the increased “transparency” that would be brought about by a “fee disclosure” law that not surprisingly turned out to be so convoluted that nobody has been able to fully understand what was disclosed nor has anyone been able to understand what services they are actually paying for or if these service fees are reasonable in light of the services they are using.  If it was clear that retirement plan advisors get paid comparable to brain surgeons, perhaps a light bulb would go on in the heads of business owners and executives that might motivate them to ask this one basic question:  “How much money in HARD DOLLARS have retirement plan participants been paying for each service every year?”  Shockingly, many of these uninformed plan sponsors include law firms, banks, and accounting firms – the very service professionals we rely on to give us advice!

There have been several programs put on by NPR, Bloomberg TV News, 60 Minutes, and PBS Frontline attempting to expose how the retirement plan industry operates.  However, none of them have had any effect, likely because even these programs haven’t delved deeply enough into how intertwined each of the industry players truly are.  Until enough people are able to peel back all the layers and become outraged at what is happening to our money, nothing of any significance will change.

 

Response to an Article Criticizing 401(k) Plans

Anyone familiar with my blog and my practice should be well aware that although I make a living providing financial advice with respect to employer-provided retirement plans, I am no fan of them to say the least.  So one would think that I would agree with any article that similarly espouses my disdain for 401(k) plans.  In this particular case, however, one would be wrong.  In fact, this article has made me now do something I never thought I would do:  Defend 401(k) plans – or at least separate legitimate criticisms from criticisms that are either false, incomplete, or just don’t make any sense.  Does this mean I no longer believe the industry is a corrupt racket that needs to be put out of its misery and that 401(k) plans should be abolished?  Does this mean I’m pushing 401(k) plans because I make more money if people contribute more? (I don’t make more money because I charge flat fees based on the work I do that are not asset-based)  Of course not.  it’s just that when I saw an article like this, I felt compelled to write a response for people who formed an opinion on 401(k) plans based on this article without doing any further research.  Here is a breakdown of each point:

1. You can be wiped out overnight.

A report on CBS’s 60 Minutes TV show asked of 401(k)s, “What kind of retirement plan allows millions of people to lose 30-50 percent of their life savings just as they near retirement?” Good question. Unlike other investments that are protected from losses, your 401(k) rises and falls with the stock market where you have absolutely no control. Retirement planners will tell you the market averages 8-11 percent returns per year. That may have been true last century, but this century has seen that turned into a fiction. From 2000 to 2015, the market was up just 8.4 percent total when adjusted for inflation, or 0.56 percent per year, and that was after a substantial market rally. Do you want to live your ideal life only if the market cooperates?

The idea that one can lose money in the stock market is no secret.  Of course the market is subject to risk, but the author is only referring to market risk, yet there are many other types of risks to consider such as inflation risk, interest rate risk, credit risk, taxability risk, call risk, liquidity risk, reinvestment risk, social/political/legislative risk, currency/exchange rate risk, and business risk.  Does anyone really believe that they have control over any of these types of risks either?  Is “having control” necessarily better? Yes, the market has not fared well over this recent 15 year period, but cherry-picking one particularly bad time period is hardly evidence to change your entire investment philosophy.  If so, Warren Buffett wouldn’t have said this in one of his annual letters to Berkshire shareholders, dated February 28, 2014: “If “investors” frenetically bought and sold farmland to each other, neither the yields or prices of their crops would be increased.  The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties. Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions.  The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit.  So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm. My advice to the trustee couldn’t be more simple:  Put 10% of the cash in short-term government bonds and 90% in a very low-cost S & P 500 index fund (I suggest Vanguard’s).  I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, or individuals – who employ high-fee managers.”

2. Administrative Fees and the Tyranny of Compounding Costs

The toll taken by 401(k) and associated mutual fund fees is staggering, and can eat up more than half your gains. With 401(k)s, there are usually more than a dozen undisclosed fees: legal fees, trustee fees, transaction fees, stewardship fees, bookkeeping fees, finder fees and more. But that’s just the beginning. The mutual funds inside 401(k)s often take a 2 percent fee off the top. If a fund is up 7 percent for the year, they take 2 percent and you get 5 percent. It sounds like you’re getting more, right? At first, yes, but in the end the mutual fund wins. As Jack Bogle, the founder of Vanguard explains it, “What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compound costs.” If you contribute $5,000 per year, from 25 years old to 65, and the fund goes up 7 percent every year, your money would turn into around $1,143,000. Yet, you’d only get to keep $669,400, or less than 60 percent. That’s because 7 percent compounding returns hundreds of thousands more than a 5 percent compounding return, and none of it goes to you. The 2 percent fee cuts the return exponentially. In the example above, by the time you turn 75 the mutual fund may have taken two-thirds of your gains. Bogle puts it like this, “Do you really want to invest in a system where you put up 100 percent of the capital, you take 100 percent of the risk, and you get 30 percent of the return?”

While there have been no more vocal critics about 401(k) plan fees than me, the statement that “The mutual funds inside 401(k)s often take a 2 percent fee off the top” is flat out wrong.  To illustrate, according to The Investment Company Institute: “In 2013, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.58 percent, down from 0.63 percent in 2012. Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid mutual funds fell from 0.60 percent in 2012 to 0.58 percent in 2013. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.50 percent in 2012 to 0.48 percent in 2013. Participants in 401(k) plans tend to pay lower fees than fund investors overall. The 0.58 percent paid by 401(k) investors in equity funds is lower than the expenses paid by all equity fund investors (0.74 percent) and less than half the simple average expense ratio on equity funds offered for sale in the United States (1.37 percent) (see the figure below for more detail). The experience of hybrid and bond fund investors is similar.” Plans with very little assets will likely have “all-in” expenses of 2 percent or more, but this figure also includes record keeping, administration, custodial, and broker/advisory fees.

3. There’s no cash flow for better opportunities.

The theory behind 401(k)s is you keep putting money away, where you can’t easily touch it without penalty for 30 years, and it will compound into enough to retire on. We’ve seen why you should be suspicious of that story.  Compounding charts don’t look the same at 0.56 percent annual returns. But here’s the other problem.  Money left to compound unpredictably for 30 years is stagnant money.  There’s no cash flow ready to direct to today’s best uses.  Instead, it’s sitting still inside one 30-year bet, while newer, better opportunities may be passing you by.

Not having ready access to money set aside for retirement is a legitimate criticism, so there is nothing wrong with supplementing your retirement outside of your company’s 401(k) plan in additional to making contributions to the plan.  However, just because the market is unpredictable doesn’t mean the money is stagnant.  The word “stagnant” means inactive or showing no activity while the word “unpredictable” means uncertain.  So whether or not money will compound unpredictably has nothing to do with whether or not money will be stagnant. It is also not clear if other opportunities are necessarily better since this question can depend on a variety of factors such as what these opportunities are, your cash flow situation, your current income, your age, whether or not your 401(k) plan has a match, and what your 401(k) investment options and expenses are.

4. Lack of liquidity when you need it most.

Money in a 401(k) is tied up with penalties for early withdrawal unless you know how to safely navigate obscure IRS codes. This means you can’t spend or invest your money to enrich your life without great difficulty and/or taking a big financial hit. The only exception allows you to borrow a limited amount of money from your 401(k) if you promise to pay it back. This automatically leads to double taxation and a slew of other negatives, the worst being if you lose your job or your income dries up, the deal changes and you must repay the loan within 60 days. Not even break-your-thumb loan sharks are that cruel.

Lack of liquidity and the double taxation of loans are definitely issues with 401(k) plans, so I won’t argue that point, but the statement “The only exception allows you to borrow a limited amount of money from your 401(k) if you promise to pay it back” is incorrect.  A simple Google search for “401(k) withdrawal exceptions” will provide evidence to refute this claim by showing many other examples of penalty-free withdrawals that you don’t have to promise to pay back.

5. Lack of knowledge encourages unconscious investing.

With 401(k)s, I’ve seen environmentalists who are unknowingly invested in big oil, and anti-smoking advocates invested in big tobacco. Simply put, 401(k)s teach people to be unconscious while investing. Think about it, how much do you really know about your 401(k)? Do you know the funds in which you’re invested? Do you know the details of the companies inside those funds? Do you know the fund manager’s philosophy, history, and performance?  Probably not, How can you expect to gain a return from something that you know so little about? And how can this be called investing? It’s not investing, it’s gambling.

Yes, I’m sure it’s true that many people do not know the 401(k) funds they’re invested in, but why wouldn’t this also be true to any investment outside of their 401(k) as well?  Do people necessarily know any more about the details of insurance and annuities they buy?  If not, would it be better for people to just keep all of their money in cash and never invest in anything? I’m not arguing that it isn’t a good idea to understand the details of your investments.  I just don’t understand why 401(k)s should be singled out any more than any other investment.

6. Fear of taxes leads to underutilization.

401(k)s are tax-deferred, meaning you avoid paying taxes today by committing to paying them later. But taxes are historically low compared to the days of 50, 60, or even 90 percent marginal rates of the past and chances are, with record national debt, that taxes are going up. If you don’t like paying taxes today, why would you want to pay more taxes in the future? The tax deferral aspect of the 401(k), which is touted as a great boon, is actually a primary factor contributing to its underutilization. When the time finally comes to enjoy or live off the money, retirees are incentivized to let the money sit for fear of triggering burdensome tax consequences.

Has the author of this article never heard of a Roth 401(k) which is funded with after-tax dollars meaning the qualified withdrawals are income tax free?  “No, of course this does not mean that a Roth 401(k) serves as a comprehensive financial solution, but if you are going to criticize 401(k) plans, you cannot ignore the fact that this is an option in more plans now than in years past.  Chris Carosa’s thorough and objective article about the debate over the tax advantages of 401(k) plans is far more informative, especially because it is not a completely pro 401(k) article.”  I would highly recommend it to anyone who is genuinely interested in hearing a wide range of informed opinions on the subject.

7. Higher tax brackets upon withdrawal.

It’s ironic that people anticipate that they’ll have healthy returns on their qualified plan while at the same time figuring they’ll be in a lower tax bracket at retirement. If you have achieved any measure of success, you should actually be in a higher tax bracket at retirement. Most advisors, however, assume the opposite. Even worse, those higher tax brackets are likely to be even higher and more daunting in the future.

Again, why not mention the fact that Roth 401(k)s do not burden participants with taxable withdrawals and that more financial professionals and publications are recommending utilizing this option?

8. No exit strategy.

Early withdrawal penalties, over-the-top borrowing rules, daunting taxes, these are all incentives never to touch the money, ever. Getting into a 401(k) seems simple enough. But how are you going to get your money out of it?

See above

9. 401(k)s are easy targets for estate taxes.

Frankly, 401(k)s are sitting ducks for predatory estate taxes. Since there’s no clear exit strategy without major penalties or taxes,  at the end of a person’s lifetime their 401(k)s often end up being a pile of cash that looks very tempting to the government. When it is passed on to the next generation, it’s likely not only hit by the income tax, but the estate tax as well.

This is true, but does not mention the fact that few people will ever pay any estate taxes based on the federal and state estate tax exemptions which have increased significantly.  Yes, we don’t know what estate taxes will be 30 or 40 years from now, but it is nonetheless important to point out that most people have been and are still not subject to estate taxes, especially given that the current average 401(k) balances for people 55 and over is still only about $150,000.

10. The government owns your 401(k) and can change the rules at will.

You may be surprised to learn this, but your 401(k) does not even technically belong to you. Read the fine print and you will find “FBO” (For Benefit Of). The tax code makes it technically owned by the government, but provided for your benefit. Judging from world history, 401(k)s could be in great jeopardy. Other countries have raided private retirement plans to fund the government. Argentina did it in 2008, Hungary did it in 2010 and Ireland in 2011. Similar pension raids occurred in Poland and France. Could it happen in America? Well, during the last recession, Congress invited an expert to give testimony on confiscating 401(k)s and turning them into a public retirement plan like Social Security. It only takes one economic crisis before you retire for possible rule changes or confiscation of your 401(k).

I have read similar articles and would never assume the government is out to protect us.  Governments have committed far worse crimes than stealing people’s retirement money, so I would not be surprised if our government did this or at least forced some of our 401(k) investments to be in U.S. Treasury bonds.  Of course this could happen to IRAs as well. But what the author also doesn’t mention is that there is no reason why our same “benevolent” government won’t also tax life insurance and annuity cash values.

11. Turmoil in retirement.

When it comes time to withdraw money in retirement, maybe you can stomach the taxes, but can you stomach the market swings? Suppose you’ve projected to withdraw 6 percent a year, based on an average annual return of 8 percent. What will you do when the market is volatile? If your fund is down 10 percent one year, any withdrawal is tapping into your principal. At that point, your only choices are start withdrawing principal, or leave the money alone until your account is up again. Try sleeping at night when your income is at the complete mercy of the markets.

There are multiple ways to withdraw money during retirement, and a strategy that works for one person may not work as well for another since the best strategy will depend on the facts and circumstances of the situation.  But to imply that none of your money (or at least very little) should be invested in the market at all (the market is volatile whether it’s in an IRA, brokerage account, or 401(k) plan) simply because the market is volatile is not intended to actually teach anyone anything, but to convince people to just buy life insurance and commission-based annuities.  David Loeper’s article entitled “How Much is that Guarantee in the Window?” does an excellent job analyzing the costs of guaranteed income and exhaustively analyzing if the costs outweigh the benefits.  In other words, it is meant to educate and make people smarter.   Here are some highlights: Out of 1,000 random lifetimes with simulated random returns even more extreme than have been historically observed, in 997 of the outcomes the annuity had a negative relative value to the simple balanced portfolio. There was a 90% chance the annuity guarantee would cost the investor more than $149,000 (about 1.5 times the initial investment) and a 75% chance it would cost more than $243,000. Does this sound “quite valuable” to you? Think about the other factors on top of this. The cash flows we modeled for spendable income were net after taxes and fees versus the annuity that would likely have some portion of the payment being taxed at ordinary income rates. The annuity has zero liquidity where the balanced portfolio offered flexibility to adjust future income withdrawals if there was an unexpected immediate cash need. Of course, we are also assuming the insurance company financially survives a Great Depression environment and can honor its promise to pay.

12. Lost without a comprehensive plan.

I’ve witnessed many people whose finances are in shambles, yet who continue to contribute diligently to their 401(k) plans. It’s like someone with a slit wrist tending to a scraped knee.  You need a macroeconomic, big-picture plan that identifies, prioritizes and manages all pieces of your financial puzzle in harmony with each other. You don’t need a general, one-size-fits-all plan that’s sold to everyone. I don’t understand how having a “big-picture” plan and a 401(k) plan are mutually exclusive. Can’t a “big-picture” 401(k) plan include analyzing the costs and benefits of a 401(k) plan (including the value of the 401(k) match which was never mentioned in this article) to determine how much, if anything, should be invested?

13. Neglect of stewardship and responsibility.

401(k) plans encourage people to give up responsibility for their investment decisions. They believe they can just throw enough money at the “experts” and, somehow, 30 years later, they’ll end up with a lot of money. Then when things don’t turn out that way, they blame others. A true financial plan requires stewardship and responsibility. In short, saving for retirement is wise and prudent. But other investment philosophies, products and strategies can meet your financial objectives much more quickly and safely than a 401(k). Investing for cash flow, or investing directly in a business, or Cash Flow Banking, where you become your own “bank,” could be smarter moves. Even paying off a high interest rate loan can be a smarter move than contributing to your 401(k). Whatever you choose, I urge you to do it as a conscious investor. I suggest that you don’t swallow Wall Street’s promises blindly, and look to those who tell the whole truth about your financial options.

Again, while I don’t mean to imply that investing in a brokerage account or IRA poses the same issue, it is important to note that the same principles of investing still apply.  Also, does this mean that any money invested in the market necessarily ignores stewardship and responsibility? I agree that paying off a high interest rate loan can definitely be a wiser course of action than investing in a 401(k) plan, especially because so many are loaded with such significant and unnecessary expense that erode people’s returns. As for “Cash Flow Banking”, why not just call it what it is?:  Whole Life Insurance.  In fact, if the title of the article were more honest, it should be called:  Why You Should Buy Life Insurance and Commission-based Annuity Products Instead of Investing in your 401(k) Plan.  Now that would at least be an article where I know what the agenda is.

My point here is not that there is necessarily anything wrong with whole life insurance or annuities.  I’m sure there are many ways in which whole life insurance or annuities can fit well into a financial plan in some circumstances.  I don’t believe they are necessarily a worse alternative than 401(k) plans (in case one gets the impression that I am “pro-401(k) plan and anti-life insurance).  And I also want to stress that it’s not always best to always blindly max out your 401(k) for all of the reasons I have written about on my website and blog.  But if you represent yourself as a “financial advisor” to your clients when you cannot legally provide advice without telling your clients they can buy the same annuities without the commissions or surrender charges or that there are blogs like this that are actually meant to help people make more informed decisions because they expose conflicts of interest while 100% of your compensation comes from life insurance and commission-based annuities is dishonest.  Why not just call yourself a life insurance and annuity salesman and tell all of your clients that you can’t provide financial advice, but if they were to use another professional acting in the capacity of a registered investment advisor and fiduciary, then they could receive financial advice?  What’s wrong with laying out all of the alternatives to your clients so they can make informed decisions?  There’s no shame in that.  Isn’t that the whole reason why they seek out financial professionals in the first place?  Butchers don’t call themselves dieticians.  They sell meat while not pretending to sell anything else and people are happy to buy it.  The problem is when people mistake their butcher for a dietician.

Another analogy is the proper labeling of our food.  As consumers, it is best for us to know all of the ingredients in our food, especially if we are allergic to certain foods.  So shouldn’t we demand the same rigorous standards for labeling the services of financial professionals?

I understand there is meaningful debate over what type of advisor compensation model is best for the client, and I agree that when ideas are subjected to the public process of critical exchange, then we all learn something.  But at the very least, clients should understand that when someone makes all of their money from life insurance and commission-based annuities and cannot legally provide advice, they are more like butchers than dieticians.  If clients did understand, I suspect many of these “advisors” would either go out of business or have to change their way of doing business to more honestly and completely reflect how they make money.  Maybe doctors could start doing that too.